Contractor incorrectly measured for custom replacement window by measuring window 1.5" taller than necessary. They then attempted to proceed with the installation anyway and cut the top of the vinyl frame on the new window to make it fit into the existing frame. Is this an acceptable way of installing? We think not, but the contractor is claiming it is. I already called the manufacturer and they said doing this violates the warranty and the frame would not be covered going forward. I am demanding a new window be ordered but they are balking.

+1. The key as randy mentioned is following the manufacturers standards. In some cases, a lip or utility groove can be cut off or something along those lines, but I would surmise that a full 1.5" cut off will be detrimental and void the warranty. We can only go based on the info that you have provided here, however again, I'd reinforce the fact that the manufacturer's stance should be your guiding light. If this installer has a manufacturer rep come out and approve it (ie: honor the warranty), then you should be fine. If not, I would have to say that you cannot accept this. You paid for the warranty, so that is non-negotiable.

1.50" too tall of a window warrants a reorder and stop work on that opening in my book. With that being said, nobody is perfect and we all make mistakes from time to time. In my last 2-years of 60 to 70 hour work weeks without any real time off or vacations I've oversized a couple of orders by 1/8" to 3/16" and have had to remove accessory grooves with a mulitmaster type tool. It's a non-structural vinyl part of the extrusion with most manufacturers such as Soft-Lite and OKNA. With Sunrise one can't remove the accessory groove as it's not offset from the frame, thus when you goof up on those you have to chisel/plane down sills or the head. Every installer has been there.

thus when you goof up on those you have to chisel/plane down sills or the head.

That's what I was thinking too Mike. The possibility of a utility groove cut back and chisling the head and sill COULD net somewhere close to the needed clearance to make these useable, however that is still pushing the envelope... It also sounds like the damage may already be done.

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